Question 3rd Batch

8/12/2019 Question 3rd Batch

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QUESTION: C.P.A review

FARA company buys a restaurant for $1 million with no residual value and a20-year expected life. It is being depreciated on the straight-line method. Atthe beginning of the third year, the neighborhood around the restaurant starts tobecome dangerous and its fair value drops to $789,000. However, therestaurant still has many loyal customers and is able to generate $53,000 in netcash flows each year for its remaining life. What should be the net book valuefor the restaurant on the first day of the third year?

A. $789,000B. $900,000C. $924,000

D. $954,000

Answer is B

Depreciation is $50,000 per year ($1,000,000/20 years) so net book value at theend of Year Two is $900,000 ($1,000,000 less $50,000 and less $50,000).Although the fair value is only $789,000, the restaurant is not viewed as havingits value impaired because the future cash flows of $53,000 for 18 years gives atotal ($924,000) that is greater than the net book value of $900,000. As long asthe expected cash flows are greater than net book value, the asset is not held to

be impaired and remains reported at net book value.

Regulation

What is the Statute of Frauds?

A. It sets out rules that indicate the time periods for rules and other laws to bein existence.B. It sets out rules that require certain contracts to be in writing.

C. It sets out rules that indicate which actions are gross negligence and whichare fraudulent.D. It sets out rules that spell out the actions that an agent can take on behalfof a principal.

Answer is B.


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Most contracts can either be established orally or in writing. However, theStatute of Frauds indicates which contracts must exist in writing and cannot becreated orally. For example, according to the Statute of Frauds, a contract inwhich a surety agrees to answer for the debts of another must be in writing.

Auditing

The Ramsey Corporation is being audited by Keillor and Associates CPAs. Theauditors discovered that Ramsey is reporting a note receivable from LexingtonCorporation, a company that recently filed for bankruptcy. The note is stillreported at its $250,000 face value although a reasonable estimation is that only$140,000 will be collected. If these amounts are considered material, which of

the following statements is true?

A. An unqualified opinion should be given but only with an added explanation ofthe problem.B. An unqualified opinion cannot be rendered and the scope paragraph must bemodified.C. A disclaimer of opinion must be given.D. An unqualified opinion cannot be rendered but the scope paragraph shouldnot be modified.

Answer is D

The account balance is materially misstated so, therefore, an unqualified opinionis not appropriate. A disclaimer is also not correct because the auditor doeshave an opinion. The problem here does not relate to the work of the auditor(which would be described in the scope paragraph). The work of the auditorseems to be complete and reasonable. Therefore, the scope paragraph is notchanged. Instead, an explanatory paragraph is added to describe the problemand the opinion paragraph is changed.

BEC

The Drexel Donut Company produces 8,000 dozen donuts under normalcircumstances but believes that 5,000 to 10,000 dozen donuts is a relevant rangefor its current production levels. Fixed costs within this relevant range are


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$24,000. At 8,000 dozen, the company calculates that a dozen donuts has atotal cost of $4.00. If the company manages to push production levels to10,000 dozen donuts, what is the cost of a dozen?

A. $3.40B. $3.50C. $3.80D. $4.00

Answer isA

At 8,000 dozen, the cost is $4.00 per dozen or $32,000 in total. Of thatamount, $24,000 is fixed cost so the remaining $8,000 must be the variable

cost. That is a variable cost of $1.00 per dozen ($8,000/8,000 dozen). Thus,within the relevant range, fixed costs will stay at $24,000 and variable costs willstay at $1.00 per dozen. For 10,000 dozen, the fixed cost will be $24,000 andthe variable costs will be $1.00 per dozen or $10,000. The total is $34,000 for10,000 dozen donuts or $3.40 per dozen.

FAR

The Lawson Corporation buys an inventory item for $321 that it plans to sell for$352. However, by the end of the year, the replacement cost of that inventoryitem has dropped to $270 because the market has been flooded with units.Lawson believes the net realizable value is now $318. If IFRS is being applied,what is reported for this inventory item on the companys balance sheet?

A. $270B. $318C. $321D. $352

Answer is B

Both IFRS and US GAAP report inventory at the lower of cost or market. UnderUS GAAP, the computation of market is quite complex involving bothreplacement cost and net realizable value. In IFRS, market is simply the netrealizable value. Since net realizable value ($318) is lower than cost ($321), the


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$318 is reported. Furthermore, in US GAAP, if the reported value of this item isreduced and then ever increases, no removal of the loss is made. However, forIFRS, if the value rebounds, the loss (or a portion of the loss) is removed.

Auditing

An audit team is doing an engagement that requires the use of governmentalauditing standards. Where can generally accepted government auditingstandards be found?

A. In the yellow book produced by the Government Accountability Office.B. In the white book produced by the US Treasury Department.C. In the blue book produced by the Office of the Controller General.

D. In the red book produced by the Chief Accountant of the SEC.

Answer isA.

According to Wikipedia, the Generally Accepted Government Auditing Standards(GAGAS), commonly referred to as the Yellow Book, are produced in theUnitedStates by theGovernment Accountability Office (GAO). The standards apply tobothfinancial andperformance audits ofgovernment agencies.Five generalstandards are included:Independence,Due Care,Continuing Professional

Education (CPE),Supervision,Quality Control. The Yellow Book standards are used by auditorswho examine the federal government, . . .

Regulation

The Curry Corporation (an accrual based taxpayer) had sales in the current yearof $500,000. The company wrote off $9,000 of its accounts receivable asuncollectible. At the end of the year, the company still had accounts receivable

of $100,000. The companys accountant believes that roughly 2 percent of itssales for the year or 11 percent of its accounts receivable will eventually prove tobe uncollectible. What amount can be deducted as bad debts for the year?

A. ZeroB. $9,000C. $10,000
http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Government_Accountability_Officehttp://en.wikipedia.org/wiki/Financial_audithttp://en.wikipedia.org/wiki/Performance_audithttp://en.wikipedia.org/wiki/Government_agencyhttp://en.wikipedia.org/wiki/Internal_audit#Organizational_independencehttp://en.wikipedia.org/wiki/Due_Carehttp://en.wikipedia.org/wiki/Continuing_Professional_Educationhttp://en.wikipedia.org/wiki/Continuing_Professional_Educationhttp://en.wikipedia.org/wiki/Supervisorhttp://en.wikipedia.org/wiki/Quality_Controlhttp://en.wikipedia.org/wiki/Quality_Controlhttp://en.wikipedia.org/wiki/Supervisorhttp://en.wikipedia.org/wiki/Continuing_Professional_Educationhttp://en.wikipedia.org/wiki/Continuing_Professional_Educationhttp://en.wikipedia.org/wiki/Due_Carehttp://en.wikipedia.org/wiki/Internal_audit#Organizational_independencehttp://en.wikipedia.org/wiki/Government_agencyhttp://en.wikipedia.org/wiki/Performance_audithttp://en.wikipedia.org/wiki/Financial_audithttp://en.wikipedia.org/wiki/Government_Accountability_Officehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States


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D. $11,000

Answer is B

Corporations file a form 1120. According to the instructions for the form 1120,in determining bad debts, the company should enter the total debts thatbecame worthless in whole or in part during the tax year. The governmentprefers the actual fact of the debt becoming worthless to any estimate of thatamount. In this year, $9,000 in accounts were judged to be uncollectible.

BEC

A company is looking into making an investment and discovers that the net

present value of that investment is a positive $6,000. What does that mean?

A. The investment has a cost to the company of $6,000.B. The investment has an expected residual value at the end of its maturity of$6,000.C. The present value of the cash flows generated by the investment is greaterthan its cost by $6,000.D. The future cash to be generated by the investment is greater than itspresent value by $6,000.

Answer is C

One way to determine if an investment opportunity should be pursued is todetermine the present value of those future cash flows that it will generate andcompare that amount to its cost. The difference is known as the net presentvalue. If that number is positive (the present value is higher than the cost), theinvestment is considered a wise one. In that case, the value of the future cashflows is greater than the current amount that must be spent. In computing thepresent value, a discount rate must be selected. Several possible rates can be

applied although the companys weighted average cost of capital is frequentlyused.


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On January 1, 2010, Heath Corp. established an employee stock ownership plan (ESOP).

Selected transactions relating to the ESOP during 2010 were as follows:

On April 1, 2010, Heath contributed $45,000 cash and 3,000 shares of its $10 par value

common stock to the ESOP. On this date, the market price of the stock was $18 a share. On

October 1, 2010, the ESOP borrowed $100,000 from Union National Bank and acquired6,000 shares of Heath's common stock in the open market at $17 a share. The note is for

one year, bears interest at 10%, and is guaranteed by Heath. On December 15, 2010, the

ESOP distributed 8,000 shares of Heath's common stock to employees of Heath in

accordance with the plan formula. On this date, the market price of the stock was $20 a

share.

In its 2010 income statement, what amount should Heath report as compensation expense

relating to the ESOP?

A) $99,000

B) $155,000

C) $199,000

D) $259,000

Correct Answer: A

Explanation: A company records compensation expense based upon cash or stocks (at fairmarket value) contributed to the plan during the year. Therefore, the $45,000 cash and $54,000

value of the shares contributed to the plan are reported as compensation expense. The second and

third transactions noted in the question do not result in any expense recognition.

On January 1, Year One, a company buys equipment for $60,000 and pays another $5,000

to have it assembled and installed. The equipment has an expected life of 10 years and a

residual value of $10,000. What amount of depreciation expense is recognized for Year

Two if the double-declining balance method is applied? Assume that the half-year

convention is not being used.

A$8,000

B$8,800

C$9,600

D$10,400

The correct answer was D.


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The cost of this equipment is $65,000. The $5,000 is included because both assembly andinstallation are viewed as normal and necessary to get the item into position and condition togenerate revenues. There is no accumulated depreciation for the first year so depreciation is$13,000 ($65,000 times 2/10). This expense reduces the book value to $52,000 for the secondyear so that the expense will be $10,400 ($52,000 book value times 2/10).

A company owns a warehouse that cost $1,200,000 and has accumulated depreciation of

$500,000. At the present time, this asset has a remaining life of 10 years but is currently

worth only $610,000. The company anticipates that this warehouse can be used to generate

net cash inflows of $68,000 in each year for the remainder of its life. These cash flows have

a present value of $517,000 using a reasonable interest rate. What loss should the company

recognize in connection with the impaired value of this asset?

A-0-

B$70,000

C$90,000

D$183,000

Answer: C

In evaluating whether the value of an operational asset has been impaired, a preliminary test ismade. If the future cash flows generated by the asset are expected to be less than its current book

value, the book value is reduced to the fair value of the asset. For this warehouse, the currentbook value is $700,000 ($1.2 million less $500,000) but the future cash inflows are only$680,000 ($68,000 per year for 10 years). As a result, the company must reduce the $700,000book value to the $610,000 fair value of the warehouse. That reduction creates a $90,000 loss.

The Braxton Company holds equipment with a cost of $98,000. At the present time,

accumulated depreciation of $40,000 is recorded in connection with this equipment. The

asset has a fair value of $72,000. This equipment is traded for machinery that is viewed as

entirely dissimilar in nature. It has a fair market value of $65,000. The parties go through

intense negotiations. Braxton finally convinces the other party to give $8,000 in cash

because the values are not the same. What is the capitalized cost of the new machinery?

A$58,000

B$64,000

C$65,000

D$72,000


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The Richmond Company has adopted the double-declining balance depreciation method for allof its equipment. It also uses the half-year convention. The company acquired equipment for$15,000 on August 1, Year One. This equipment has an estimated life of eight years and anexpected salvage value of $3,000. This asset is eventually sold at the end of February in YearThree for $9,000 in cash. What is the impact on the company's reported net income for Year

Three as a result of this sale (rounded)?

A$445 loss

B$658 loss

C$387 gain

D$523 gain

The correct answer was C.

Declining balance methods compute depreciation based on the book value of the asset for theperiod. For Year One, the cost of $15,000 cost minus zero accumulated depreciation gives abook value of $15,000 which is multiplied by 2/8 and then by 1/2 year to arrive at depreciationexpense of $1,875. Although the asset was only held for five months in Year One, the half-yearconvention is applied. For Year Two, the $15,000 cost minus $1,875 accumulated depreciationequals a book value of $13,125 which is multiplied by 2/8 giving depreciation of $3,281(rounded). For Year Three, the $15,000 cost minus accumulated depreciation of $5,156 ($1,875plus $3,281) gives a book value of $9,844. That figure is multiplied by 2/8 and by 1/2 (since itwas held for a partial year) so that depreciation expense for Year Three is $1,231 (rounded).Book value at the date of sale is the $15,000 cost less accumulated depreciation of $6,387($1,875 plus $3,281 plus $1,231) or $8,613. The asset was sold for $9,000 which is $387 more

than book value so that a gain of that amount is appropriate.

On January 1, Year One, the Saxon Company bought an oil platform to use in drilling for oil inthe Gulf of Mexico. The company paid $90 million for the platform and expects it to last for 10years. When the oil has been removed from the site, the company is required legally to removethe platform from the area. The cost of that disposal is anticipated to be $18 million which, at areasonable annual rate of 12 percent, has a present value of $6.3 million. The straight-linemethod will be used to determine depreciation. The effective rate method is used to determineinterest. What is the total impact on the company's reported net income for Year One?

A$9,630,000

B$10,386,000

C$10,542,500

D$11,012,000


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The correct answer was B.

This asset has a capitalized cost to Saxon of $96,300,000. That is the cost of buying the oilplatform as well as the present value of the asset retirement obligation that will eventually haveto be paid because it is a legal requirement. Based on the straight-line method and an expected

life of 10 years, depreciation expense will be $9,630,000 each year. The obligation for theretirement is initially reported as a liability of $6,300,000. For Year One, interest expense (calledaccretion expense in connection with an asset retirement obligation since no debt instrumentactually exists) is 12 percent of the $6,300,000 balance ($756,000). Saxon reports a total expenseof $10,386,000 (depreciation of $9,630,000 plus accretion of $756,000).

FAR

The FGCC Company had an enacted income tax rate of 28 percent. The company ended Year One with

a deferred income tax liability of $40,000, a deferred income tax asset of $50,000 and a valuation

allowance of $19,000. The enacted tax rate was raised at the start of Year Two to 30 percent. Thecompany ended Year Two with a deferred income tax liability of $70,000, a deferred income tax asset of

$40,000, and a valuation allowance of $24,000. On the companys Year Two income statement, what is

the amount of income tax expensedeferred that is reported?

A. $15,000

B. $25,000

C. $35,000

D. $45,000

Answer is D

A balance sheet approach is used for deferred taxes. The balance sheet totals are computed and an

adjustment is made to move each previous year total to the newly computed amount. The balancing

number for that entry is the income tax expense-deferred amount to be reported on the incomestatement. The expense is not computed directly but only as the amount that moves previous balance

sheet accounts to their updated totals. Here, the liability is increased by a $30,000 credit (from $40,000

to $70,000), the asset is reduced by a $10,000 credit (from $50,000 to $40,000), and the valuation

allowance is increased by a $5,000 credit (from $19,000 to $24,000). The balancing amount is a $45,000

debit which represents the income tax expense-deferred. Notice here that the enacted tax rates are

not used in this calculation because the proper asset and liability balances have already been calculated.


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Auditing

The Cosby CPA firm is auditing the financial statements of Hamster, Inc. for the latest year. Hamster

manufactures widgets in its factory located in Gaffney, South Carolina. The auditors are currently

analyzing each of the entries made to the repair expense account. What is one of the purposes for

doing this testing?

A. The auditors hope to gain evidence that the companys liabilities are not overstated.

B. The auditors hope to gain evidence that the companys net income is not understated .

C. The auditors hope to gain evidence that the companys current assets are not overstated.

D. The auditors hope to gain evidence that the companys current assets are not understated.

Answer is B.

The auditors are looking for the possibility of material misstatements. The repair expense account is

studied to determine whether any costs that should have been added to an asset account were

incorrectly added to this expense account. If that has taken place, the expense balance will be

overstated and, as a result, reported net income will be understated. If that has occurred, the

machinery and equipment balances will also be understated but they are not current assets.

Regulation

Mr. Wilson has placed his house on the market for $319,000. However, he sends a signed letter to Mr.

Dennis offering to sell the property to him for only $300,000. Mr. Dennis responds with a signed letter

agreeing to buy the house for $290,000. What is the best term for the letter written and sent by Mr.

Dennis?

A. An implied acceptance

B. A purchase agreement

C. A counteroffer


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D. A promissory letter

Answer is C

A counteroffer is a return offer made by a party who has rejected an offer. Mr. Dennis has basicallyturned down the $300,000 offer made by Mr. Wilson but has then made an offer to buy the house for

$290,000. Because this offer follows the rejection of Mr. Wilsons offer, it is referred to as a counteroffer.

BEC

An economist is hoping to see a future increase in gross domestic product. The economist is looking for

evidence that might indicate this future change will happen. Which of the following is most likely to

indicate this possibility?

A. Increase in the hours worked each week by production workers

B. Increase in the amount of imports

C. Decrease in the rate of inflation

D. Decrease in the monetary amounts in circulation.

Answer is A

According to Wikipedia, the gross domestic product (GDP) is themarket valueof all officially recognized

final goods and services produced within a country in a given period of time. Thus, GDP is a measure

of productivity. The more production workers work the more likely it is that the GDP will increase.
http://m1e.net/c?162245347-dN96gDMNLYv7M%4013539488-RF4tjOiLu13z6http://m1e.net/c?162245347-dN96gDMNLYv7M%4013539488-RF4tjOiLu13z6http://m1e.net/c?162245347-dN96gDMNLYv7M%4013539488-RF4tjOiLu13z6http://m1e.net/c?162245347-dN96gDMNLYv7M%4013539488-RF4tjOiLu13z6


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ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS

Problem: Assume you are the controller for the City of Havisham. The city has a fiscal year

ending December 31, 2013. IF the city was to produce financial statements right now, thefollowing figures would be included:

--Governmental Activities: Assets = $800,000, Liabilities = $300,000, and Change in NetAssets for the period = increase of $100,000

--Business-Type Activities: Assets = $500,000, Liabilities = $200,000, and Change in NetAssets for the period = increase of $60,000

--Governmental Funds: Assets = $300,000, Liabilities = $100,000, and Change in FundBalances = increase of $40,000

--Proprietary Funds: Assets = $700,000, Liabilities = $300,000, and Change in Net Assets forthe period = increase of $70,000

Other information: The city council is viewed as the highest level of decision-making authorityfor the government. Where applicable, current financial resources are viewed by the governmentas available if collected within 75 days of the end of a fiscal year.

(1)TRUE or FALSEIn the information provided above, an error has apparently been

made that must be corrected because the amount of proprietary fund assets ($700,000)cannot be greater than the amount of business-type activity assets ($500,000).

ANSWER: Proprietary funds contain both Enterprise Funds and Internal Service Funds.Business-type activities contain Enterprise Funds and possibly some of the Internal ServiceFunds. Therefore, the proprietary fund assets can be the same as (or bigger than) business-typeactivity assets. However, proprietary fund assets cannot be less than the amount of business-type activity assets. The answer is FALSE.

(2)TRUE or FALSEA separate governmental fund (such as money held for the

construction of Highway 61) is holding assets totaling $32,000. Based on that information,

this fund must be reported as a major fund.

ANSWER: The asset balance ($32,000) for this fund is larger than 10 percent of the total assetsheld by all governmental funds ($300,000)this is one of the criteria for being a major fund.(The same threshold can also be used with liabilities, revenues, or expenditures/expenses.)


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However, a second criterion must also be met. The asset (or other) balance ($32,000) for thisfund must be at least 5 percent of the total for both the governmental fund and the enterprisefunds. There is not enough information available here to make that determination. Whetherthis fund is a major fund cannot be ascertained. The answer is FALSE.

(3)TRUE or FALSEInvestments are given to the city with a value of $5,000,000. Allincome earned from these investments must be used to construct a small library in one ofthe local neighborhoods but the investments must be held forever. When the investments

are received, revenue of $5,000,000 is reported in the Permanent Fund.

ANSWER: This is a voluntary nonexchange transaction. As far as can be told from theproblem, there are no eligibility requirements on the $5 million, only on the subsequent income.Because the money cannot be spent, it is recorded in a Permanent Fund. The income, though,will be reported in a Capital Projects Fund because it is held for construction. Answer is

TRUE.

(4)TRUE or FALSEInvestments are given to the city with a value of $5,000,000. All

income earned from these investments must be used to construct a small library in one of

the local neighborhoods. If the money is not properly spent, it must be returned. Near

the end of 2013, income of $600,000 is earned. Construction will not begin until 2015.

Deferred revenue of $600,000 must be reported in a Capital Projects Fund.

ANSWER: The income here must be used for construction so it is reported in a Capital ProjectsFund. The income has an eligibility requirement imposed by the outside donorit must bespent on construction of the library or be returned. Therefore, until this eligibility requirement

has been met, the income is reported as deferred revenue. The answer is TRUE.

(5)TRUE or FALSEThe city starts a bus system to help eliminate traffic congestion.

Passengers are charged a nickel for each trip although that fee will not come close to

covering the cost of the bus system or pay for its debts. Because the fee will not cover the

cost of this operation, the bus system is reported as a part of the General Fund rather than

as a separate Enterprise Fund.

ANSWER: Unless the revenue is the sole security for the debts of the bus system or the

activitys costs are required to be recovered through the fee or the fees are set to recover theactivitys costs, then an Enterprise Fund can be used but the city is not required to do so. Thatis the case here. If any of these standards is met, the use of an Enterprise Fund is required.Because none of them is met here, the city may record the bus service in the General Fund but isnot required to do so. The answer is FALSE.

(6)TRUE or FALSEThe city council passes its annual budget for all General Fund

activities. Revenues are expected to be $1,000,000 and approved expenditures are


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$900,000. These budgetary amounts are recorded through a journal entry at the

beginning of the year (an entry that is removed at the end of the year). In recording this

budget, an estimated revenue account is debited for $1,000,000.

ANSWER: To record a budget so that the projected increase or decrease in the fund balance

will be obvious (a credit would be an anticipated surplus and a debit would be an anticipateddeficit), estimated revenues are debited and appropriations are credited. Answer is TRUE.

(7)TRUE or FALSEThe city council passes its annual budget for all General Fund

activities. Revenues are expected to be $1,000,000 and approved expenditures are

$900,000. These budgetary amounts are recorded through a journal entry at the

beginning of the year (that entry is removed at the end of the year). In recording this

budget, an expenditures account is debited for $900,000.

ANSWER: To record a budget so that the projected increase or decrease in the fund balancewill be obvious (a credit would be an anticipated surplus and a debit would be an anticipated

deficit), estimated revenues are debited and appropriations are credited. Expenditures are notrecorded as part of the budget process. Answer is FALSE.

(8)TRUE or FALSEIn government-wide financial statements, pension trust funds are

included within the governmental activities.

ANSWER: Pension trust funds are fiduciary funds because the government is holding assets thatgo to an outside party. Fiduciary funds are not included in government-wide financialstatements because government officials are not able to make use of them. Answer is FALSE.

(9)TRUE or FALSEThe government bought a three-year insurance policy on January

1, 2013 for its school system. If the purchases method had been used, the amount ofexpenditures reported by the city would be larger for that year than if the consumption

method had been used.

ANSWER: In the purchases method the amount of prepaid expenses or supplies that areacquired are recorded immediately as expenditures. In the consumption method, only theamount used up or consumed during the period is recorded as an expenditure. Here, threeyears of insurance has been bought but only one year has been used up. Answer is TRUE.

(10)TRUE or FALSEAn income tax is classified as derived tax revenue.

ANSWER: Income taxes and sales taxes are both derived tax revenue because the tax is derivedfrom a specific event (the earning of income or the making of a sale). Answer is TRUE.

(11)TRUE or FALSEAssume that after the figures on page one of this test were

determined, you learned that the city was entitled to $100,000 in income taxes on income

earned during 2013. Starting on January 1, 2014, the city will collect $1,000 per day for

the next 98 days (the final balance will prove uncollectible). As a result, the reported


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change in net assets for the governmental activities in government-wide statements for 2013

will go up by $98,000.

ANSWER: Accrual accounting is used for government-wide financial statements. Derivedtaxes like income taxes are recognized at the time of the underlying event (the earning of

income). Therefore, the revenue is recognized in 2013 and is $98,000, the amount expected to becollected. Answer is TRUE.


determined, you learned that the city was entitled to $100,000 in income taxes on income

earned during 2013. Starting on January 1, 2014, the city will collect $1,000 per day for

the next 98 days (the final balance will prove uncollectible). As a result, the reported

liabilities for the governmental funds in the fund financial statements as of December 31,

2013, will go up by $23,000.

ANSWER: Modified accrual accounting is used by the governmental funds for fund financialstatements. Derived tax revenues (such as this income tax) are recognized in the same period asthe underlying event. However, only the amount that is measurable and available can berecognized. Because government officials have chosen 75 days as their definition ofavailable, the first $75,000 is revenue and the next $23,000 is deferred revenue (a liability).The remainder will not be collected and is recorded as an allowance. Answer is TRUE.

(13)TRUE or FALSEThe police department ordered some equipment in October 2013

for $43,000. It was received on December 29, 2013, but at a cost of $44,000. In theGeneral Fund, the encumbrance account was credited for $44,000 and the expenditure

account was debited for $44,000 to indicate the switch from monetary commitment to a

liability.

ANSWER: The encumbrance (commitment) is removed and an expenditure and liability is thenrecognized. However, the encumbrance (along with the fund balance reserved forencumbrances) is removed at its $43,000 balance. The $44,000 expenditure and liabilitybalances are then recorded. Answer is FALSE.

(14)TRUE or FALSEThe police department ordered some equipment in October 2013

for $43,000. The equipment was not received prior to the end of 2013. The police chief

authorized the department to accept and pay for the equipment when it arrived in 2014.

In reporting fund financial statements at the end of 2013, a fund balance committed

amount should be reported on the balance sheet for the governmental funds of $43,000.


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ANSWER: "Fund balance committed is used when assets have been designated by the highestlevel of government authority. In other words, the $43,000 is being held for this purchase basedon a decision of the highest level of authority. The city council has that authority here ratherthan the police chief so this amount should be recorded as a fund balance assigned. Answeris FALSE.

(15)TRUE or FALSEA cash amount of $32,000 is transferred from the General Fund

to a Capital Projects Fund. On the statement of activities, for the government-wide

financial statements, this transaction is shown as both a transfer in and a transfer out.

ANSWER: This is an intra-activity transaction between two governmental funds. The totalreported by the governmental activities is not affected in any way by the transfer. Therefore, noreporting is necessary in the government-wide financial statements. Answer is FALSE.

(16)TRUE or FALSEA cash amount of $32,000 is transferred from the General Fund

to an Internal Service Fund to pay for some work that was done by the print shop for the

school system. On the statement of revenues, expenditures, and other financing sources

and uses for the Governmental Funds (in the fund financial statements), this transaction

will be reported as an other financing use.

ANSWER: This is an internal exchange transactiona transfer made to pay for work done.Because actual work was performed in the same manner as with an outside party, thetransaction will be handled as if it took place with an outside party. It is recorded as an

expenditure rather than an other financing use. Answer is FALSE.


determined, you learned that the city was entitled to $100,000 in property taxes which were

assessed on December 29, 2013, solely to finance government operations in 2014. Starting

on January 1, 2014, the city will collect $1,000 per day for the next 98 days (the final

balance will prove uncollectible). The reported change in net assets for the governmental

activities in the government-wide statements reported at the end of 2013 will go up by

$98,000.

ANSWER: No revenues can be recognized in 2013 because this is an imposed nonexchangerevenue that cannot be used until 2014. There is no change in net assets in 2013. Answer isFALSE.


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assessed on December 29, 2013 solely to finance government operations in 2014. Starting

on January 1, 2014, the city will collect $1,000 per day for the next 98 days (the final

balance will prove uncollectible). The change in fund balances reported for the

Governmental Funds at the end of 2013 will go up by $60,000.

ANSWER: No revenues can be recognized in 2013 because this is an imposed nonexchangerevenue that cannot be used until 2014. There is no change in the fund balances in 2013.Answer is FALSE.



assessed on December 29, 2013, solely to finance government operations in 2014. The

government collected $5,000 on December 30, 2013 and the rest in the first four weeks of2014. On government-wide financial statements for the governmental activities as of

December 31, 2013, the total liability balance will be increased by $5,000.

ANSWER: The $5,000 collected in 2013 cannot be used until 2014 and is, therefore, reportedas a deferred revenue until 2014. That deferred revenue is a liability. Starting with the thirdtesting window of 2013, the CPA Exam will test GASB 65 which would label this amount as a"deferred inflow of resources," which is shown separately from liabilities. Until then, either theold rule (liabilities) or the new rule (deferred inflow of resources" could be tested. I would besurprised if they get in a big hurry to test the new rule. I am going to assume the old rule here.Answer is TRUE.



assessed on December 29, 2013, solely to finance government operations in 2014. The

government collected $5,000 on December 30, 2013 but the rest will not be collected until

June of 2014. On fund financial statements for the Governmental Funds as of December

31, 2013, the total liability balance will be increased by $5,000.

ANSWER: The $5,000 collected in 2013 cannot be used until 2014 and is, therefore, reported

as a deferred revenue until 2014. That deferred revenue is a liability. As with the previousquestion, starting with the third testing window of 2013, the CPA Exam will test GASB 65. Thatpronouncement requires this amount to be reported as a "deferred inflow of resources" ratherthan as a liability. Until then, either the old rule (it's a liability) or the new rule (it's a deferredinflow of resources) can both be tested. I am assuming that the old rule is tested. Answer isTRUE.


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(21)TRUE or FALSEInvestments are given to the city with a value of $5,000,000. All

income earned from these investments must be used to construct a small library in one of

the local neighborhoods but the investments must be held forever. In 2013, income of

$480,000 was received from these investments. However, none of this money has yet been

spent. On fund financial statements, the year-end balance sheet for the Governmental

Funds must show a fund balance restricted of $5,000,000 and a fund balance committed of $480,000.

ANSWER: The $5,000,000 cannot be spent so a fund balancenonspendable figure isappropriate on the balance sheet. The $480,000 has been restricted by an outside party so thata fund balancerestricted should be reported on the balance sheet. Answer is FALSE.

(22)TRUE or FALSEThe city bought some land several years ago for $220,000. At

the very end of 2013, the land is sold for cash of $250,000. The net asset total in the

government-wide financial statements goes up by $220,000 more than the fund balancetotal for the Governmental Funds.

ANSWER: In government-wide financial statements, cash goes up $250,000 and land goesdown $220,000 so the net assets increases by $30,000. In fund financial statements, cash goesup $250,000 so fund balances are increased by $250,000. The land was not a current financialresource and was not recorded as an asset. The last sentence in this question is backwards.The net asset total in the government-wide financial statements goes up by $220,000 LESS thanthe fund balance total for the Governmental Funds. Answer is FALSE.

(23)TRUE or FALSEThe city incurs an expense on December 30, 2013, of $90,000 that

will not be paid for 4 months. On the 2013 financial statements, there is a reconciliation

that starts with the total change in fund balances for the Governmental Funds and works

down to end with the total change in the net assets for the Governmental Activities.

Because of differences between modified accrual accounting and accrual accounting, this

$90,000 must be subtracted as part of this reconciliation.

ANSWER: No expenditure is recognized in 2013 because current financial resources will not beused within 75 days. There is no change in fund balances for the Governmental Funds.However, under accrual account, an expense is recognized in 2013 so there is a reduction in net

assets on the government-wide financial statements of $90,000. The reconciliation starts withzero and goes to a negative $90,000. That requires a subtraction of $90,000. Answer is TRUE.

(24)TRUE or FALSEOn December 30, 2013, the city issues $400,000 in long-term

bonds for face value to finance school operations. On the 2013 financial statements, there

is a reconciliation that starts with the total change in fund balances for the Governmental


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Funds and works down to end with the total change in the net assets for the Governmental

Activities. As a result of the bond issuance, this $400,000 must be subtracted as part of

this reconciliation.

ANSWER: On the fund financial statements, the city debits cash and credits other financing

sources which increases the fund balances by $400,000. On the government-wide financialstatements, the city debits cash and credits bonds payable which does not change the amount ofnet assets. The reconciliation starts with a positive $400,000 and goes to a zero. That change(from $400,000 to zero) requires a subtraction of $400,000. Answer is TRUE.

(25)TRUE or FALSEOn December 30, 2013, the city spends $900,000 on a sidewalk.

On the 2013 financial statements, there is a reconciliation that starts with the total change

in fund balances for the Governmental Funds and works down to end with the total change

in net assets for the Governmental Activities. As a result of this acquisition, this $900,000

must be subtracted as part of this reconciliation.

ANSWER: On the fund financial statements, the city debits expenditure and credits cash. Theexpenditure decreases the fund balances by $900,000. On the government-wide financialstatements, the city debits capital assets and credits cash which does not change the amount ofnet assets. The reconciliation starts with a negative $900,000 and goes to a zero. That change(from negative $900,000 to zero) requires an addition of $900,000. Answer is FALSE.

(26)TRUE or FALSEA discretely presented component unit is shown in the

government-wide financial statements as if it were one of the funds within thegovernment.

ANSWER: A blended component unit is shown as if it were one of the funds within thegovernment. A discretely presented component unit is shown on the far right side of thegovernment-wide financial statements. Answer is FALSE

(27)TRUE or FALSEAll of the board of directors for a nature museum are appointed

by the city. This fact alone makes this nature museum a component unit of the city.

ANSWER: There are other requirements. The museum must be fiscally dependent on the cityor city officials must be able to impose their will on the board or the museum must impose afinancial burden on the city or provide a financial benefit. Answer is FALSE.


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(28)TRUE or FALSEThe city appoints none of the governing board of a parks

commission. This fact alone prohibits this parks commission from being a component unit

of the city.

ANSWER: If the parks commission is fiscally dependent on the city and creates a potential

financial burden or benefit, then it is a component unit even if someone else appoints the board.Answer is FALSE.

(29)TRUE or FALSEThe city has a school system with a separately elected governing

board (elected by the public). This fact alone makes the school system a special purpose

government with its own financial reporting to be made.

ANSWER: There are other requirements. To be a special purpose government, the activitymust also be legally independent and fiscally independent. Answer is FALSE.

(30)TRUE or FALSEThe city council officially passes a budget for its General Fund

activities. In studying this budget as it is presented within the CAFR, a citizen will find the

following three columns: the budgetary figures as initially passed, the budgetary figures

as amended during the period, and the actual results for the period.

ANSWER: In order to show citizens the ongoing budgetary process as well as actual results, thecity shows its original budget, final amended budget, and actual results. A variance column isalso recommended but not required. Answer is TRUE.

(31)TRUE or FALSEThe modified approach applies only to infrastructure assets.

ANSWER: Because infrastructure has a long life that is often extended indefinitely throughappropriate maintenance, the recording of depreciation has often been questioned. It can beavoided by meeting the requirements of the modified approach. Answer is TRUE.

(32)TRUE or FALSEThe modified approach has become widely used in state and localgovernment accounting over the last few years.

ANSWER: Because the modified approach requires significant recordkeeping to show thatinfrastructure assets are being properly maintained, it has not been widely used. The cost is notviewed as worth the achieved benefits. It can be found but is not in wide use. Answer isFALSE.


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(33)TRUE or FALSEThe state of Virginia requires the city to buy equipment to

monitor its air quality. The state gives the city $100,000 to help pay for the equipment

acquisitions. This grant is known as a voluntary nonexchange transaction so that revenue

is recognized when all eligibility requirements are met.

ANSWER: This grant is a government-mandated nonexchange transaction. Answer is FALSE.

(34)TRUE or FALSEThe citys school system charges its students a $10 per person fee

each year. In recording this revenue in the government-wide financial statements on the

statement of activities, it should be shown as miscellaneous revenue directly under the

general revenues.

ANSWER: This revenue comes directly from the activity itself and is shown as program revenuealong with the expenses of that activity in order to arrive at a net cost/benefit for the activity. Itis not viewed as general revenue. Answer is FALSE.

(35)TRUE or FALSEThe city receives a work of art worth $100,000 as a gift and also

spends $70,000 in cash to buy a second art work. Both art works will be exhibited publicly

and properly protected and preserved. The city council passes a resolution that if either

item is ever sold the proceeds will be used to buy replacement art works. Both of the art

works are viewed as inexhaustible. The city has the option to report both of these pieces of

art as expenses rather than as assets in the government-wide financial statements.

ANSWER: Both meet the three criteria. Therefore, because these art works provide limitedfuture economic benefits, the city can record the $100,000 and the $70,000 as either assets or asexpenses in the government-wide financial statements. Answer is TRUE.

(36)TRUE or FALSEA city constructs curbing for a neighborhood in a special

assessment project in which the individuals whose property is being benefitted will pay the

money for the work. The city has no legal responsibility at all for this work so it is

recorded in an Agency Fund. The money collected should be reported as programrevenues on the statement of activities in the government-wide financial statements.

ANSWER: Agency Funds fall within the Fiduciary Funds. Fiduciary Funds are not included inthe government-wide financial statements. Answer is FALSE.


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(37)TRUE or FALSEAssume that the city issues 30 day tax anticipation notes on

December 30, 2013, just to finance the government until new taxes are collected. These

notes are issued at their face value of $500,000. On the 2013 financial statements, there

is a reconciliation that starts with the total change in fund balances for the Governmental

Funds and works down to end with the total change in the net assets for the Governmental

Activities. As a result of the bond issuance, this $500,000 must be subtracted as part ofthis reconciliation.

ANSWER: Because this debt will be paid within 75 days of the end of the year, it is recorded inthe same manner on both the fund financial statements and the government-wide financialstatements. In both cases, cash is debited and notes payable is credited. No reconciliation isneeded. Answer is FALSE.

(38)TRUE or FALSEOn January 1, 2013, assume that the city received a grant for

$130,000 with the money to be used to supplement the salaries of the police and firedepartment workers. The money will not be received by the city until after the salaries

have been paid. On December 30, 2013, all $130,000 is paid to appropriate workers and

the city applies for reimbursement to receive the grant money. It will be received within

the next month. The $130,000 revenue is recognized in the government-wide financial

statements in 2013 but not in the fund financial statements for 2013.

ANSWER: The eligibility requirements have been met and the money will be received within 75days of the end of the year. It is revenue on both government-wide financial statements andfund financial statements. Answer is FALSE.

-Put your faith in GOD but dont forget to do your part!!-

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